Share this story
Close X
Switch to Desktop Site

Communist Hungary ventures into a capitalist-style bond market

It was opening day for the automotive parts store on the outskirts of Budapest. Drawn by a television advertising program, hundreds of car owners were trying to see this novelty for Hungary - a ''department store for drivers.'' The parking lot was full and cars lined the highway. Police were trying to keep traffic moving.

This early spring event was made possible by something also new in the socialist East bloc - a nascent capital market.

About these ads

''It is a new area of the financial system of this country,'' noted Laszlo Borbely, general director of the Ministry of Finance.

Skala, a cooperative that owns a chain of stores, is one of the first companies in Hungary to sell bonds to the public to finance its expansion, including this large, red auto parts store.

The suggestion that a bond market seems like a basic tool of a capitalist economics does not trouble Mr. Borbely.

''As a financial expert,'' he said, ''I can say that it involves no contradiction to our economic and political system. They (the bonds) are adjusted to our economic system.''

What if an investor managed to buy a lot of bonds, becoming, in a sense, a capitalist?

The Finance Ministry official said he saw no difference between such an investor and one who put a large sum of money in a savings bank account at a high interest rate.

In any case, as with a bond market anywhere, the purpose is to mobilize unused funds owned by enterprises or individuals for some investment purpose elsewhere.

About these ads

The first bond issued here was offered in March 1983 by the State Development Bank and the Hungarian Petroleum and Gas Industry Trust to extend the domestic network of natural gas pipeline.

It was available only to Hungarian businesses - not individuals. The 200 million forint ($4.4 million) issue was oversubscribed and had to be doubled.

Mr. Borbely said the government realized it had to have a more flexible and organized way for moving unused capital from one state enterprise to another. Instead of a government ministry and central planners allocating the funds, a business borrows investment money through a bond issue, underwritten by a bank, advertised, and sold in a public market of sorts.

Another bond issue, by the government Post and Telecommunications Company, was offered only to residents of Szeged, in southeast Hungary. Bond buyers got not only an investment, but also a promise of installation of a telephone within three years. That is a real prize in a country where people often wait 15 or 20 years for a telephone.

From the government's standpoint, such public issues tap some of the savings of the people. These are substantial in a nation where it is sometimes guessed that some 70 percent of the working population moonlights in one way or another.

To the borrowing enterprise, bond issues offer a somewhat lower rate of interest than bank loans - say a 10 to 12 percent coupon instead of loans costing as much as 14 percent.

Follow Stories Like This
Get the Monitor stories you care about delivered to your inbox.